The Tale of the Two Italies: Regional Price Parities Accounting for Differences in the Quality of Services

This study estimates regional price parities (RPP) in Italy based on household budget data and estimated pseudo unit values to compare living standards between Italian regions. The simultaneous consideration of spatial variation in prices and in quality of services between regions is a distinctive feature of this study. The study makes a methodological contribution by proposing a quality adjustment procedure to spatial price calculations whose appeal extends beyond Italy to the international context of cross-country PPP calculations. The average difference in the true cost of living between North and South is about 30-40 percent depending on the regions selected for comparison. Such a divide in cost of living and in market efficiency, probably one of the highest differentials in the world, is the traditional incipit of the tale of the two Italies. The estimations of RPP allows us to investigate the policy conundrum of why Italians, and dependent workers in particular, do not migrate towards the South given the much lower cost of living there. The answer, which takes us closer to the end of the tale, lies partly in the superior quality of services in the North and partly in the severe restriction on job opportunities in the South, especially for female earners.